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How to choose the best business line of credit for your small business

Business line of credit

How to choose the best business line of credit for your small business

Updated: October 15th, 2020

How to choose the best business line of credit for your small business

You’re not alone if you are worried about cash flow as a small business owner. More than two-thirds of business owners lose sleep about it too – wondering how they’re going to juggle receivables, payments, payroll and other expenses. 

When cash flow is tight, a business line of credit could be a good solution. A line of credit is designed to help with short-term expenses and fluctuations in income. As a small business owner, you’re probably used to having to choose from a variety of financing options, but what exactly makes business lines of credit different? Read more to find out.

Business line of credit overview 

If you’ve ever taken out a small business loan, then you’re probably used to receiving a lump-sum amount upfront and repaying it in installments over a set period of time. A business line of credit is different and is more similar to a small business credit card than a term loan. 

Like with business term loans, you can direct the funds toward a variety of business expenses with a business line of credit.  It can be used for replenishing inventory, moving to a new location, hiring new employees, and more. Where it differs from business loans, is that you won’t see a lump-sum amount arrive in your bank account and you won’t make the typical predetermined fixed monthly payments over the life of your business line of credit account. 

Revolving vs. non-revolving lines of credit 

Revolving lines of credit

A business line of credit could be either revolving or non-revolving. You’ll find that lines of credit are often revolving, and it can be a great tool to manage cash flow. Similar to a credit card, you gain access to credit that is capped at a predetermined amount. You don’t begin accruing interest on the amount until you draw on the funds, this is when interest accrual starts. 

And once you’ve drawn on the line, you can expect to make payments in either weekly or monthly installments that unfold over a period of between six months to three years. Your repayment terms will vary from lender to lender. Once you start repaying, the business line of credit is replenished by the amount you repaid minus any interest.

Non-revolving lines of credit

With a non-revolving line of credit, the funds aren’t replenished once you pay the balance down. But on the plus side, non-revolving lines of credit are likely to have features such as a lower interest rate and a more predictable repayment structure, which could help with budgeting.

Secured or unsecured, that’s the question 

One of the major decisions you’ll need to make when applying for a business line of credit is whether you want the financing to be secured or unsecured. For the most part, you can expect that your business line of credit will be offered as an unsecured debt. This typically comes down to which lender you choose to work with, and the amount of capital you’d like access to.

With an unsecured line of credit, you won’t need to worry about providing some type of collateral to secure the loan. Another common feature of unsecured business lines of credit is a variable interest rate, or one that will change based on an index. An unsecured business line of credit generally falls within the range of $10,000 to $100,000. 

If you’re looking to gain access to an amount that exceeds $100,000, you’ll want to be prepared to provide some collateral to secure the line of credit. This could come in the form of business assets, personal, or business real estate or certificates of deposit. In the worse-case scenario of a default, the lender will liquidate the asset to repay the debt. 

How to get a line of credit for your business 

When it comes time to get a line of credit for your business, you can choose to approach an online lender or a traditional bank. 

Before you decide which path to take, you’ll want to be sure that your credit profile is up to snuff. This is also the case when you’re pursuing a small business line of credit or a loan. If you are familiar with the stringent credit score needed for an SBA loan, then you may find some relief in the fact that some business owners have qualified for a business line of credit with a score of over 560.  The longer the operating history of your business, the longer the term of the line of credit is likely to be. 

Now that you are armed with information about business lines of credit, we hope that you are more informed about the type of business financing that will help you to reach your goals and grow your business for the long term.  

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